The Stock market snapped a three-day winning streak on worries about Europe yet once again. After starting the day up, the Dow fell 180 points.
Analysis shows that credit-default swaps, a popular indicator of market health, are thinly traded.
Unemployment rates fell in two-thirds of US cities last month, despite slowdown in hiring.
Here are the top financial stories of the day:
1) Dow drops 180 points, ending 3-day winning streak-From the AP
Stocks are closing lower, ending a three-day winning streak, as investors worry about Europe's ability to contain its debt crisis.
Traders focused on remarks from German Chancellor Angela Merkel suggesting that the second Greek bailout package might have to be renegotiated. Several European leaders want banks to take bigger losses on Greek bonds. France and the European Central Bank oppose the idea.
The Dow Jones industrial average fell 180 points, or 1.6 percent, to close at 11,011. Bank of America fell the most, 4.9 percent.
The Standard & Poor's 500 fell 24, or 2.1 percent, to 1,151. The Nasdaq fell 55, or 2.2 percent, to 2,492.
Five stocks fell for every one that rose on the New York Stock Exchange. Trading volume was average at 4.3 billion shares.
2) A Fear Gauge Comes Up Short-From the Wall Street Journal
Wall Street is glued to a gauge of trading fear that has surprisingly few trades behind it.
In recent years, credit-default swaps—contracts that give the buyer the right to collect a payment from the seller if a borrower defaults on its obligations—have risen from obscurity to an avidly tracked barometer of the financial health of everything from Bank of America Corp. to Greece.
In some cases they have even come to serve as a stand-in for stock quotes when U.S. exchanges are closed.
Before stock markets opened in New York on Aug. 23, for example, the price quoted for the cost of insuring against a default on Bank of America rose sharply, hitting a record high. A Nomura Securities trader sent out an email alert citing the derivatives price: "Ugly out there this morning."
Yet a Wall Street Journal analysis shows that actual trades in these widely cited derivatives are few and far between—and the quotes that market observers bandy about often aren't based on actual trades at all.
While the swaps can help investors hedge risks and bet on market trends, the thin trading underlines a key shortcoming of an instrument that has a huge influence on risk perceptions. During periods of stress, the actions of a few traders can have an outsize impact on delicate market psychology.
"The market does not fully understand the limitations in trading, or the lack of liquidity, as CDS spreads are often quoted as readily as the DJ industrial average nowadays," said Hong Yan, a professor of finance at Shanghai Advanced Institute of Finance who is on leave from the University of South Carolina. "This could be potentially dangerous in a very volatile and uncertain market since CDS spreads are used much more frequently and prevalently."
The Journal analyzed data compiled by Depository Trust & Clearing Corp., a central warehouse that collects swaps trading information from investment banks. That analysis shows that even for the most popular credit-default swaps, such as those for Bank of America debt, daily trading is dwarfed by that in the stock market and often, too, in bonds.
For the week ending Sept. 16, the most recent data available, the gross notional value of swaps referencing Bank of America—that is, the value of the contracts outstanding—rose from the prior week by $700 million, according to Depository Trust.
By comparison, some $8.5 billion of the Charlotte, N.C., company's stock traded during the same week.
Despite the thin trading, investment banks and media outlets frequently point to swaps pricing as an indicator of the health of the global financial system's constituent parts.
On Tuesday, the limited trading was further highlighted in a Federal Reserve Bank of New York paper that analyzed three months of swaps data for both single-name corporate bonds and baskets of swaps. New York Fed officials sought to better understand how frequently the derivatives trade amid regulatory efforts to require investment banks to report real-time transaction data.
The study found little actual trading.
"A majority of the single-name reference entities traded less than once a day, whereas the most active traded over 20 times per day," the New York Fed paper said.
"The CDS market, in general, is not like the fast-trading stock market," said Darrell Duffie, a derivatives expert and finance professor at Stanford University.
That isn't to say there is no money at stake in the credit-default swap market. The net notional value of swaps outstanding on Bank of America, for instance, was $5.8 billion at Sept. 23, a similar level from the start of the year, according to Depository Trust. That is the maximum amount of money that would be exchanged in the event of a default.
The contracts have been used for years by banks to unload risks they don't want and by hedge funds and other investors to bet on changing market trends. But since the financial crisis of 2008, they have been best known as a measure of market stress, following the warning signals they flashed ahead of the problems at Bear Stearns Cos. and Lehman Brothers Holdings Inc.
In the case of credit-default swaps for corporate bonds, a buyer pays a sum quarterly for the derivative. If a bond defaults, the losses are covered by the seller of the contract.
Costs of the protection can rise if investors believe the underlying debt is getting riskier. Those trading the swaps often are big banks or, to a lesser degree, hedge funds.
Data vendors such as Markit Group Ltd. and CMA, a unit of CME Group, use computer systems to extract swaps prices—including quotes—from electronic messages between investment banks and investors.
The companies aggregate that pricing data, which makes its way to a wider audience seeking a gauge of default risk—an audience that may not recognize the limitations of the data they are looking at and the nature of how the derivatives trade.
3) Unemployment rates fell in majority of US cities-From the AP
Unemployment rates fell in roughly two-thirds of U.S. cities last month, despite zero job growth nationwide.
The Labor Department said Wednesday that unemployment rates dropped in 237 of the nation's largest metro areas in August from July. They rose in 103 and stayed the same in 32. That's an improvement from July, when rates fell in 193 areas and rose in 118.
Some areas with large agricultural sectors added jobs to coincide with the start of the harvest. Auto companies boosted hiring in several other cities.
Rates also fell in Jackson, Miss., and other cities because thousands of people gave up looking for work.
People who are no longer searching for jobs aren't counted as unemployed.
Unlike national and state data, metro unemployment figures are not adjusted for seasonal changes.
The U.S. economy added no net jobs in August, the least amount of hiring in almost a year. The national unemployment rate remained 9.1 percent for the second straight month.
Businesses pulled back on hiring this summer after the government said the economy barely expanded in the first six months of the year.
Most of the cities that reported sharp improvement still suffer from steep unemployment rates.
Unemployment dropped the most last month in Yuba City, Calif., a heavily agricultural area in Northern California. The city's rate fell from 18.6 percent in July to 17 percent last month.
Another big decline was in Modesto, Calif., home of the E. & J. Gallo Winery, the largest winemaker in the
world. The rate there dropped from 17.3 percent in July to 16 percent last month.
The unemployment rate in Mansfield, Ohio fell from 11.4 percent to 10.1 percent, mostly because the city added manufacturing jobs.
El Centro, Calif. and Yuma, Ariz. had the highest unemployment rates among cities, at 32.4 percent and 29.4 percent, respectively. They are adjacent counties with heavy farm economies and large contingents of migrant labor. Yuma's rate fell while El Centro's ticked up.
Bismarck, N.D. reported the nation's lowest unemployment rate, at 3 percent. Lincoln, Neb. had the next lowest rate, at 3.6 percent, followed by Fargo, N.D., at 3.9 percent.
Among the 49 cities with populations of 1 million or more, Las Vegas had the highest unemployment rate, at 14.2 percent. Riverside-San Bernardino, Calif. had the second highest, 14.1 percent. Both were hit by huge housing bubbles and haven't yet recovered.
Oklahoma City, Okla. had the lowest rate among big cities, at 5 percent
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